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A few weeks back we asked, “What if Recovery is Actually
Bearish?”The note led off with Seth Klarman’s
definition of a “Twinkie” market — a government manipulated,
artificially priced, blatantly unnatural concoction stuffed with
artificial ingredients.

So now, as the Twinkie market fades away, this seemed a touch
ironic:

Hostess Brands Inc said it will ask a U.S. bankruptcy judge for
permission to liquidate if enough striking workers do not return
to work by the end of Thursday to let the maker of Twinkies and
Wonder Bread resume normal operations.

Wednesday’s announcement escalates a bitter dispute between the
82-year-old company and the Bakery, Confectionery, Tobacco
Workers and Grain Millers International Union, whose members
constitute about one-third of Hostess’ nearly 18,000 employees.

Wall Street has been conditioned to ignore the Middle East after
countless isntances of “boy who cried wolf” syndrome. There is
always some drama on the brink of escalating over there. Thomas
Friedman wonders aloud, however, if “the big one” could be
coming:

For George W. Bush, it was Iraq and Afghanistan. For Barack
Obama’s first term, it was Iran and Afghanistan, again. And for
Obama’s second term, I fear that it could be the full nightmare —
all of them at once. The whole Middle East erupts in one giant
sound and light show of civil wars, states collapsing and refugee
dislocations, as the keystone of the entire region — Syria — gets
pulled asunder and the disorder spills across the neighborhood.

Marc Faber isn’t worried about the fiscal cliff, or Europe, or
the Middle East. He is just straight up bearish on
earnings and global growth. As Faber says in a
recent CNBC interview:

“I don’t think markets are going down because of Greece, I don’t
think markets are going down because of the ‘fiscal
cliff’ — because there won’t be a ‘fiscal cliff… the market
is going down because corporate profits will begin to disappoint,
the global economy will hardly grow next year or even contract,
and that is the reason why stocks, from the highs of September of
1,470 on the S&P, will drop at least 20 percent, in my view.”

Our general perception is
that, after an extended period of “twinkie” style
government manipulation, with hopes attached to central bank
stimulus and corporate profits born of cost-cutting, the
possibility of resuming a secular bear market is
high. Consider:

The shift in outlook can most
clearly be seen on the weekly charts. The major
indices have “rolled over,” from a weekly perspective, and there
are no clear support levels in sight.

What about fundamental reasons to maintain optimism? Again, this
goes back to the “twinkie” problem:

US economic recovery facilitates central bank stimulus
withdrawal

Central banks have a “diminishing returns” problem even if
stimulus continues

Corporate profit trends born of cost-cutting may be tapped
out either way

Global growth slowdown means the “sugar high” of post-2008 is
fading

There are (at least) two ways to look at markets — as a
sporting event or a big picture narrative.

Those who look at the markets as a sporting event are
typically wedded to one side — the bullish side
– and tend to “root for their team” under all
circumstances and conditions. (Some root for the bear team at all
times — ahem, Zero Hedge cough cough — but they are far fewer in
number in terms of actual market particpants).

Those who look at markets as a narrative, however, can
see larger developments unfolding that are not
necessarily favorable to one side or the
other.

And thus, if you step back and look at what is happening now from
a multi-year perspective, a plausible narrative goes
something like this:

In the aftermath of the 2008 financial crisis, the greatest
globally coordinated stimulus push of all time was
conducted.

At the same time, epic levels of corporate down-sizing
and cost-cutting were implemented.

Meanwhile, weak to nonexistent recovery and crisis threats
from Europe provided cover for even more central bank
stimulus.

Markets rose powerfully for a multi-year stretch
on bolstered corporate profits and near zero interest
rates.

At the same time, China rose mightily in 2009 and took
on a seeming role as the new “engine of growth to the
world.”

Also against this backdrop, Apple (AAPL) became the most
beloved company of all time on a consumer tech tablet /
smartphone tidal wave…

And Silicon Valley again turned white hot on a powerful
social media / venture capital boom.

The entire chapter of the story as just described is
coming to a close now.

Like the Bush tax cuts, all of the above drivers are
threatening to either STALL, EXPIRE or REVERSE.